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Tax Liens 101: What They Are and Why They Hurt Your Chances of Getting a Loan

Understanding, avoiding and properly handling tax liens is critical for any small business owner hoping to obtain a small business loan. Here’s a closer look at tax liens and how they hurt your chances of getting financing.

Tax Lien Basics

If you ignore a notice of tax due and fail to pay your business taxes in full and on time, you will receive a Demand for Payment notice from the Internal Revenue Service (IRS). Within 10 days of receiving this, you must either pay your tax debt in full (including any fees, interest and penalties), or make arrangements with the IRS to pay it over time.

If you don’t, the IRS files a Notice of Federal Tax Lien. This public document tells creditors, lenders and credit reporting agencies that the government has put a lien on your property. A lien means the government has first rights to your property, and can seize and sell it to pay off tax debts.

Tax liens attach to all of your business property, including physical assets such as buildings, inventory and equipment; intellectual property assets such as copyrights, trademarks and patents; and financial assets such as stocks, general accounts, accounts receivable and business accounts.

In addition to federal tax liens attached to a business by the IRS, you can also be subject to state tax liens if you do not pay your state taxes.

How Does a Tax Lien Affect Your Business?

Tax liens ensure that the government gets paid what it is owed before any other creditors or lenders. As you can probably guess, tax liens have an extremely negative effect on your business’s credit rating—similar to declaring bankruptcy. A tax lien severely limits your ability to sell the business, sell or transfer any assets of the business, get a business loan or refinance an outstanding business loan.

The tax lien will remain on your business until you pay off your tax debt, or make arrangements to pay it off, or until the 10-year statute of limitations on tax collection expires.

How to Handle Tax Liens

The good news about tax liens is that the government rarely seizes business property to pay them off. Taxing agencies don’t want to go through this hassle—they’d much rather work out an agreement with you to pay the debt off in installments.

Your first step when you have a tax lien against your business should be to contact the agency that placed the lien. Enlist your accountant or tax professional.

The IRS will release tax liens within 30 days after the tax is paid in full. If you can’t pay the debt in full, there are three other options:

  1. Discharge of property: This removes the lien from specific property.
  2. Subordination: This doesn’t remove the lien, but allows other creditors to move ahead of the IRS in line to be paid. This could make it easier to get a business loan.
  3. Withdrawal: This removes the public Notice of Federal Tax Lien so that the IRS is not competing with other creditors for your property. You’re still liable for paying the tax, however.

For more information about these options, visit the IRS website.

After your debt is paid or repayment is arranged, your work still isn’t over. You’ll need to contact the credit reporting agencies to remove the lien from your report or modify the information to reflect payment arrangements

The best way to deal with a tax lien: Don’t get one in the first place. Never ignore notices from the IRS or your state tax board, and always put making tax payments first on your financial priority list.

Rieva Lesonsky

Rieva Lesonsky

Contributor at Fundera
Rieva Lesonsky is a small business contributor for Fundera and CEO of GrowBiz Media, a media company. She has spent 30+ years covering, consulting and speaking to small businesses owners and entrepreneurs.
Rieva Lesonsky